If you have finally located your dream home, congratulations! Now for the serious stuff: the financing. When it comes to having your home loan approved, there are a myriad of factors at play, but often loan applicants are side-lined by an unexpected problem; the low home appraisal. If your home is appraising at less than your purchase price and your previous estimates, it can throw a real monkey wrench in your home-buying plans. Read on to learn more about why this happens and how you put matters right and get your home loan back on track.
The Lingering Effect of the Real Estate Bubble
Before the housing bubble burst in 2008, home loans were being approved left and right with little to no documentation to back up the applicant's income or the value of the home. Mortgages were made based on "stated facts" and little else, resulting in home loans that were made not only to people who could not afford them, but at inflated values. In other words, these so-called "no-doc" loans were given out to people based on little to no appraisal information, and often these homes turned out to be worth a lot less than the loan was made for. This created chaos and a lot of foreclosures, with lenders left holding the bag, or the house with an inflated loan balance.
A New Way to Appraise Homes
The lending and appraisal industry has reacted to the disaster of the housing bubble by making changes in how professional home appraisers are regulated. Now, an imaginary wall stands between an appraiser and the amount of the potential home loan. This means that appraisers are no longer privy to the loan information and cannot use that as a factor in valuing the home.
Furthermore, now appraisers are now tightly managed by contracting firms. The end result of these moves have caused an upheaval in the way homes are appraised, and the appraisers are being paid less for their services, since they owe more overhead to these appraisal management companies. This has caused experienced local appraisers to leave their jobs, opening the way for people with less experience and unfamiliar with local neighborhoods. This, unfortunately, can mean unexpectedly low appraisals.
What To Do
- Hire your own independent appraiser to challenge the bank-hired appraiser. If the results are greatly different, you may have some negotiation room with the bank.
- File a formal challenge to the appraisal; be ready to show exactly where you think the appraiser went wrong.
- Ask the lender to have another appraisal done, using a different management company.
- Point out things the appraiser may have missed or that may not have been apparent but that could affect the appraised value, such as special energy-saving windows or extra insulation in the attic.
Speak to your real estate agent for help in dealing with an appraisal.